Disappointed hopes of the agricultural sector – Gazeta

In short, the FY25 budget for the agriculture sector lacks long-term vision, national priorities and strategic direction. The lack of defined goals and a coherent strategy to solve the sector’s pressing problems makes budget allocations and financial resources meaningless and ineffective.

The budget is devoid of new initiatives and appears to be merely a replication of the previous year’s budget, with minor changes to funding allocations. As such, it is unlikely to catalyze significant growth in the industry.

The agricultural sector faces three main challenges: higher production costs, lower yields and an inefficient crop marketing system. All other concerns are directly or indirectly related to these fundamental challenges.

After the Covid-19 pandemic and the Russian-Ukrainian war, the prices of agricultural produce on the world and domestic markets dropped significantly. However, prices of agricultural inputs (diesel oil, fertilizers, pesticides, seeds, electricity and labor) did not show a downward trend. As a result, the agricultural sector is struggling to remain competitive in a changing economic landscape.

The government has set an annual growth target of just 2%, a drastic reduction from the 6.25% achieved last year

After significant financial setbacks in FY24 due to unexpectedly low market prices for three major crops (cotton, corn and wheat), farmers were optimistic about potential relief and support from the government to reduce production costs, thus maintaining an impressive 6, 25 percent and 11 percent annual growth rate achieved by the agriculture sector and the crops sub-sector, respectively. However, the budget dashed these hopes, leaving farmers’ aspirations unfulfilled.

The recently announced Budget, together with the Finance Bill 2024, introduced measures such as an increase in the petroleum cess, the imposition of sales tax on tractors and the reclassification of diammonium phosphate – our second most used fertilizer – from the Sixth Schedule (sales tax exemption) to the Third Schedule to the Sales Tax Act of 1990

Moreover, the potential increase in electricity rates for tube wells and rising urea prices due to the drastic reduction in subsidies to fertilizer plants – from Rs 25 billion to Rs 3 billion, will further escalate production costs, potentially making agriculture economically unviable.

Aslam Pikhali, former senior vice-president of All Pakistan Fruits and Vegetable Exporters Association, commenting on the announced budgetary solution to shift exporters from full and final tax of 1% to standard tax regime, explained: “The current deduction of 1% C&F Value (Cost and Freight) ) exported fruit and vegetables actually accounts for about 20% of their profit margin.

“This deduction applies even to losses incurred as a result of shipment rejection or damage in transit. Exporters often source products directly from farmers or from local markets that are part of the informal economy. This complicates compliance with stringent FBR (Federal Board of Revenue) bookkeeping requirements.” He warned that such actions could result in reduced exports of fruit and vegetables, which could thwart the government’s efforts to increase tax revenues.

Following the 18th Amendment, agriculture is now a provincial matter. However, the annual federal budget undoubtedly reflects national priorities and plays a key role in shaping the trajectory of the country’s agricultural sector.

Surprisingly, the federal government has set an annual growth target for the agriculture sector of just 2% in FY25, which is a drastic reduction from the 6.25% achieved in FY24. For many, this target which is even lower than the country’s population growth rate, speaks volumes about the PML-N government’s historic anti-agricultural policies and tacit acknowledgment of the harmful effects of its own policies.

A positive development in FY24 is the growth in agricultural loans by 33.8%. Financial institutions disbursed 1.64 trillion rupiah from July to March, achieving 72.7% of the annual target of 2.25 trillion rupiah. This significant allocation highlights the government’s commitment to supporting the farming community.

The bulk of these agricultural loans were purchased by farmers at the Karachi Interbank Credit (Kibor) plus rate of more than 25% per annum – a rate usually considered prohibitive in the productive sector. At the same time, however, a significant portion of agricultural lending is attributed to various programs offering loans with subsidized margins, some as low as 7 percent or even less.

In the current budget, the government has limited funds (grants and subsidies) for these types of programs. The Margin and Risk Sharing Subsidy Scheme for Farm Mechanization (MSRSSFM), which was applauded by analysts after the budget was passed, has in fact been cut from Rs 6.4 billion in 2023-24 to Rs 5 billion.

An agricultural growth target that is lower than the country’s population growth rate speaks volumes about the government’s historic anti-agricultural policies

Similarly, the allocation for the Minister’s Young Entrepreneurs and Agriculture Loan Scheme has been significantly reduced from R30 billion to R8.6 billion. Additionally, the concessional credit subsidy for small farmers – previously pegged at Rs 8 billion in the 2023-24 Budget – has been completely withdrawn.

That said, Chaudhry Muhammad Ashraf, former Director General of the Punjab Agriculture Department, praised the allocation of Rs 5 billion to promote mechanization in the country under the MSRSSFM program, saying, “The increasing intensity of cultivation along with increasing threats from climate change necessitates timely sowing and harvesting of crops, which mechanization may facilitate. It would also help reduce post-harvest losses, which are particularly significant in wheat and rice – the two largest crops in Pakistan.”

Chaudhry also stressed the need for banks to expand their beneficiary base by adopting self-propelled agricultural machinery as collateral, in line with current banking practices for vehicle leasing.

Careful analysis of agricultural credit data reveals a stark reality: small (subsistence) farmers with less than 12 acres of land, whose interests are often mentioned in political discussions, received just 21% of the total payout.

Meanwhile, large farmers with more than 50 acres secured the larger share, worth a total of R409 billion, or almost 25% of the total payout. This disproportion is particularly concerning considering that small farmers make up over 90% of our country’s farming population.

To support equitable growth, the budget could have better supported small farmers by targeting allocations to give them preferential access to financial resources.

Moreover, Erum Tarin Khuhro – a progressive farmer from Sindh – advocated that if it is not feasible to develop a gender-sensitive federal budget, the agricultural sector budget should at least include some initiatives aimed at women, as a large number of educated women enter the sector as entrepreneurs.

She, however, admitted that the government’s announcement in the budget to promote solar energy will undoubtedly help farmers reduce irrigation costs. It further highlights the need for government intervention to reduce the costs of other agricultural inputs, especially fertilizers.

Finally, Shah also praised the plan to establish a Pakistan Climate Change Authority as envisaged in the Pakistan Climate Change Act, 2017. He emphasized that the agriculture sector, which is most affected by climate change, stands to gain immensely from this initiative.

Khalid Wattoo is a farmer and development specialist, Dr. Waqar Ahmad is a former associate professor at Faisalabad Agricultural University.

Published in Dawn Business and Finance Weekly, June 17, 2024